Foreword

Please enter a maximum of 5 recipients. Use ; to separate more than one email address.

Recipient email(s):

Recipient name(s):

Email yourself a copy?

The Year of the Rooster will soon give way to the Year of
the Dog. China begins 2018 with the administration of President
Xi Jinping entering its second term (2017 to 2022), following
the 19th National Congress of the Communist Party of China
(CPC) in October 2017. At the same time, China's 13th five-year
plan (2016 to 2020) enters its core phase.

President Xi's October 18 2017 speech to the CPC Congress
set out a clear vision of China's development priorities. The
government is committed to continuing the reform and
rebalancing objectives in the five-year plan and, at the same
time, Xi indicated a shift in focus from the pace to the
quality of growth. China is still targeting annual GDP growth
above 6% in the three years to 2020, but has dropped the use of
a long-term GDP goal. This provides more flexibility for the
government to focus on the goals of continuous 'green
development', tackling inequality, and cultivating home-grown
innovation, emphasised in Xi's speech.

China will continue to prioritise supply-side reform, with a
focus on reducing over-capacity and excessive leverage in the
economy. To this end, a tight rein is being kept on wealth
management products and other shadow finance vehicles, and
controls on the property market are in place. Partial
privatisation of many state-owned enterprises (SOEs) is
envisaged in a move to a 'mixed-ownership' model, with foreign
investment participation also sought. Various initiatives are
being pursued to support national e-commerce and e-finance
development, notably the Internet Plus action plan and the
national big data strategy. At the same time, the 'Made in
China 2025' strategy is directed at building key China
industrial strengths in strategic sectors, including advanced
IT, robotics, aerospace, new energy vehicles, new materials and
medical devices. The overall objective of these initiatives, as
set out in Xi's speech, is for China to become a 'fully
modernised socialist state' by 2035 and a 'leading global
power' by 2050.

At the centre of China's external economic strategy is the
Belt and Road Initiative (BRI). This is an ambitious plan to
more deeply integrate the economies of more than 60 countries
across Eurasia, encompassing 63% of the world's population and
35% of global GDP, through more than $1 trillion in
infrastructure investment. China is, since 2015, a net exporter
of capital; in 2016 outbound direct investment of $183 billion
greatly exceeded inbound direct investment of $131 billion.
Chinese enterprises have moved quickly to seize BRI
opportunities and, while outbound investment dipped somewhat in
2017 as the government sought to rein in some of the more
speculative overseas investments, the regulators have
facilitated BRI investments as officially 'encouraged'.

At the same time, to encourage greater inbound investment,
the State Council's January 2017 Notice No. 5, and the
subsequent August 2017 Notice No. 39, have set out a new range
of 'opening up' measures. These include plans for a streamlined
negative list of sectors for foreign investment, with various
service and advanced manufacturing sectors to be liberalised
and foreign involvement in Made in China 2025 to be encouraged.
These are accompanied by measures to protect foreign
intellectual property (IP) rights, ease visa processes, and
make the regulatory environment for foreign enterprises simpler
and more neutral vis-à-vis local firms. Further
details of these policies are awaited, with progress likely be
seen in the run up to the March 2018 session of the National
People's Congress.

With these structural economic policies as a general
context, in this seventh edition of China Looking Ahead, KPMG
China's tax experts examine recent developments and explore
what the Year of the Dog may bring for foreign investors in
China, as well as for Chinese multinational enterprises (MNEs)
investing overseas. It should be noted, however, that the
content of this publication is not intended as predictions or
forecasts of Chinese tax policies and should not be relied upon
as such.

In the seventh edition of China Looking Ahead, two key
themes come repeatedly to the fore throughout the chapters
– the impact of digitalisation and technology, and
China's repositioning of itself for a new stage in its economic
development, both of which themes are intertwined.

The first chapter, VAT: a pathway to 2025,
confronts both of these themes head-on. The chapter asserts
that the digitalisation of economies, and the leveraging of new
technologies in tax administration, will, in three major
trends: (i) drive VAT and GST systems to morph into 'in
substance' retail sales taxes; (ii) lead indirect taxes to be
managed and administered nearly entirely through technology;
and (iii) enable expansion of the tax base for indirect taxes.
In the China context, these trends are turbo-charged by the
extent to which mobile payments and e-platform commerce have
come to dominate the Chinese economy, as well as by the rapid
progress already made by the authorities with tax digitisation
(e.g. online filing, electronic invoicing, automated invoice
verification, etc.). China is well placed to move to the next
steps of automated point of sale VAT collection and blockchain
transaction chain authentication, and indeed the State
Administration of Taxation (SAT) is already looking at the
possibilities of the latter in detail. The chapter notes how
aspects of China's VAT rules, in relation to financial services
and digital economy consumer-to-consumer (C2C) activity, are
much better primed for the future than other countries' more
established VAT systems.

China's orientation to the future, and its reimagining of
its tax policy for a new global role, are further considered in
the chapters, China after BEPS, for now... and A
thousand miles begins with a single step: tax challenges under
the BRI. Since 2015, China has been a net capital
exporter, and is experiencing both the challenges and
opportunities that this brings. Chinese companies are
increasingly running into tax disputes overseas, and SAT
assistance in mutual agreement procedures (MAP) is increasingly
invoked. This experience is filtering into policy thinking,
with consideration being given to how best to collaborate with
BRI countries to smooth tax frictions. In addition, policy
options that could have created greater frictions for outbound
and inbound investment, such as the expansion of permanent
establishment (PE) rules through the multilateral instrument
(MLI), have been quietly left aside. Work is underway on the
enhancement of foreign tax relief for 'Go Out' Chinese
enterprises, including consideration of a potential China
participation exemption – this might better support
'Go Out' enterprises in the face of similar tax reform changes
being pushed through in the US. At the same time, tax
enforcement efforts for foreign business activity cross-border
into China have not let up – indeed big data and
information exchange are being leveraged to an ever greater
degree in PE and treaty relief cases.

The pressure on foreign businesses remains particularly high
in the transfer pricing (TP) space. The chapter, TP in
China: all the data in the world, outlines how, after
several years of extensive overhaul, culminating in the 2017
release of a new China TP framework, the Chinese tax
authorities now have a very robust set of TP information and
investigation/adjustment tools. They are using these to
significant effect, as made clear in the many enforcement cases
detailed in the chapter. Enforcement challenges also continue
unabated in the mergers and acquisitions (M&A) space, and
the chapter, Chasing deals: tax trying to keep pace with
business in China, looks in particular at best practices
for tackling the indirect offshore disposal rules.

The use of technology by the tax authorities to bring vast
amounts of tax information on tap is the central focus of the
chapters, Adding wings to a tiger: data in tax enforcement
in China, and A brave new world in tax transparency:
CRS in China, Hong Kong and Taiwan. The Chinese tax
authorities have invested heavily in their data storage and
processing capacity – big data analytics, married with
a sophisticated risk-driven approach to audit targeting,
promise an exponential increase in China enforcement tax
effectiveness in the coming years. China's commencement of
international automatic tax information exchanges, from 2018
onwards, will turbo-charge this process. It is, in particular,
likely to lead to a sea-change in the individual income tax
space. The chapter, This time it's personal: China IIT on
the eve of a major revamp, outlines how enforcement is
becoming increasingly robust, even in advance of this new swell
of tax data coming on tap. The China customs authorities are
becoming equally adept at leveraging data, taxpayer ratings and
automated processes to great effect, as made clear in the
chapter, All roads lead to...: new integration regime in
China customs.

The rapid re-orientation of China's economy for the future
is borne out in the chapter, One billion Chinese mobile
phone users can't be wrong: tax and the digital economy.
Continuing on the themes raised earlier in the chapter on VAT,
the digital economy chapter explains how the breathtaking
advance of China's digital economy has left the regulatory and
tax authorities struggling to keep up, resulting in ambiguity
in the taxation of the sharing economy, cloud services and
other new business models. The digital economy advance also
exposes how archaic certain aspects of the traditional tax
administration have become in the face of new modes of economic
organisation – the chapter notes some of the
administrative innovations being made in other countries in
this regard. The theme of reorienting China's future path is
also at the core of the chapters, The future is green: EPT
in China, and Better smart than lucky: China R&D
incentives 2.0. Both chapters outline the steady progress
being made in refining tax incentives for more innovative, and
more ecological, economic growth.

These chapters are rounded off with a look at developments
in Hong Kong and Taiwan. The digital economy is again to the
fore in the chapter, Taiwan: tax goes digital. This
details the recent adaptations of the VAT system to cover
cross-border digital service supplies in Taiwan, and the
planned new corporate tax digital nexus, alongside broader
planned reforms to the imputation tax regime. The chapters,
Hong Kong tax: let economy take the lead and Tax
boosts for Hong Kong funds industry, outline Hong Kong's
adherence to the MLI and roll out of TP rules, and explore the
new and improved special regimes for aircraft leasing,
corporate treasury centres, and PE funds.

2018 is the Year of the Dog in the Chinese zodiac, and a
time for action. This certainly looks to be the case, across
the spectrum, in the field of China taxation.

A special thanks to Conrad Turley at KPMG China for his
contributions to the editing and compilation of this
guide.

Lewis Lu is the head of tax at KPMG China. He is
based in Shanghai and specialises in the financial
services and real estate industries. He specialises in
formulating entry and exit strategies for these clients
for the Chinese market and has assisted many foreign
and domestic funds in structuring their investments in
China. Lewis regularly undertakes tax due diligence and
advisory engagements on M&A transactions. He also
frequently assists foreign multinationals in discussing
tax policy matters with the Chinese tax
authorities.

Lewis is a frequent speaker at various international
tax fora. He teaches international taxation for the
master of taxation students at Fudan University.

He is a member of the Canadian and Ontario
institutes of chartered accountants and is a fellow of
the Hong Kong Institute of Certified Public
Accountants.

Khoonming Ho is the head of tax for KPMG Asia
Pacific. He was the vice chairman and head of tax at
KPMG China. Since 1993, Khoonming has been actively
involved in advising foreign investors about their
investments and operations in China. He has experience
in advising on issues on investment and funding
structures, repatriation and exit strategies, M&A
and restructuring.

Khoonming has worked throughout China, including in
Beijing, Shanghai and southern China, and has built
strong relationships with tax officials at both local
and state levels. He has also advised the budgetary
affairs committee under the National People's Congress
of China on post-WTO tax reform. Khoonming is also
actively participating in various government
consultation projects about the continuing VAT
reforms.

He is a frequent speaker at tax seminars and
workshops for clients and the public, and an active
contributor to thought leadership on tax issues.
Khoonming is a fellow of the Institute of Chartered
Accountants in England and Wales (ICAEW), a member of
the Chartered Institute of Taxation in the UK (CIOT),
and a fellow of the Hong Kong Institute of Certified
Public Accountants (HKICPA).